Electricity supply costs:How to reduce them?

June 6, 2013, 8:16 pm

By Dr. Tilak Siyambalapitiya

There have been many letters and discussions, but largely criticisms, on the recent electricity price increase, which have conveniently taken cover under terms, such as, "corruption", "white elephant", "lack of reforms", "inefficiency", etc., blaming all and sundry about the high cost of supplying electricity.

In your newspaper, there have been loads of such write-ups by the public as well as by individuals, intellectuals and organisations that certainly have the capacity to analyze and find the truth, but are too lazy to do so. Blaming present and past politicians, PUCSL the regulatory commission, Ceylon Electricity Board (CEB) and Lanka Electricity Company (LECO) is the easiest to do: finding the truth, based on information available in the public domain, is more challenging. Analyzing cost information, examining their engineering limits, examining where savings are possible, is a bit more painful, even to the experienced analysts. "This is all due to corruption" or "reforms would bring the costs down", are the popular slogans.

I am not going to present a full analysis of costs in this article, but will provide some assistance to whoever likes to make an analysis himself/herself, and find the truth, and publish their findings. Let us take the key features of the Sri Lanka power generating and supply system in 2013, and identify the key facts:

1. Forecast of electricity sales to all customers: 10,950 million units. Sales in previous years were 2010 to 2012: 9191, 9971, 10,300 (est) million units, annual growth rates:10%, 8%,6% (est). All historical information is available on www.energy.gov.lk . Forecast information is available in www.pucsl.gov.lk. Sales information is important because more sales would cause more expensive generators to be used. However, on the other hand, higher sales would decrease the network costs and overheads to be lower per unit of electricity sold. Increased utilization of assets, a financial analyst would say.

2. Electricity generation from major hydropower: 3553 million units. Previous years 2009-2012 were 3355, 4988, 4018, 2727 million units. What was the worst year for hydro in recent history: 2002 (produced 2588 million units). Remember the 8-hour load shedding in 2002 ? So how were power cuts avoided in 2012 ? By heavy use of thermal energy, both oil and coal.

3. To sell 10,950 million units, 12,408 million units have to be produced. So, 1458 million units (11.7%) are forecast to be lost in the network. Historical network loss figures: 1980:20%, 1990:23%, 2000: 17%, 2010: 14%. Possible engineering limit of losses: about 9%. Why not zero?: because wires heat up when current is passed. Refresh your knowledge of physics, the Ohm’s law. Why is LECO loss only 5% (commendable): because LECO does not do long distance transmission. LECO distributes in dense urban areas only (along shorter wires than CEB has to use).

Generation costs

4. So what is the electricity production mix in 2013: hydro (CEB): 30%, Small renewable (private): 7%, Coal power plant (CEB): 15%, Oil power plants (CEB and private): 48%.

5. Components of costs: The Public Utilities Commission (PUC) says they evaluated the costs and have approved the following costs for each "business activity". All figures are per unit of electricity sold to customers. This means, the cost item (in billions of rupees, for 2013) has been divided by the amount of electricity forecast to be sold this year. Generation: 18.32 (comprising 2.75 for capacity costs, 15.57 for fuel costs), transmission: 0.77, distribution: 2.72. Total: 21.80 Rs per unit of electricity sold.

6. Generation capacity cost component: Rs 2.75 for capacity per unit of electricity sold. So, when adjusted for losses, it will be 2.44 Rs per unit of electricity produced at the point of production. The capital costs of a power plant is in the range of USD 700 (diesel) to USD 3000 per kilowatt (hydropower with reservoir/tunnels). Power plants last between 20 (diesel) and 50 (hydro) years. A power plant produces electricity for certain number of hours, depending on its type (hydro, coal, oil), operating cost and the presence of demand from customers. Sri Lanka has about 3400 thousand kilowatts of power plant capacity, which will produce a forecast requirement of 12,408 million units. If the 3400 thousand kilowatt of capacity run for 24/365 days, they can produce 30 billion units of electricity, but the requirement is only 12.4 billion units.

Even if the demand is 30 billion units per year, power plants cannot run always because they have to stop for maintenance. Hydropower plants have to follow the seasonal water flow patterns, and water release policies governed by irrigation requirements. Customers do not want electricity throughout the day; they need more in the evening, moderately during the day, and very little in the night. So before jumping into the "corruption" and "white elephant" bandwagon, using the information given in this paragraph, you can calculate and find out the capital recovery cost that can be charged for a unit of electricity produced. Do not forget to add about 2% of the investment every year, for maintenance. Any engineering asset requires between 2-4% of investment to be spent annually for maintenance.

7. Generation fuel cost component: PUC has evaluated, and agreed that the following will be the share of each type of generation. The figures are on PUC web, and the analyst has to do a little bit of work, to get the following cost numbers: 30% from hydro (zero fuel cost), 7% from private small hydro and wind ("fuel" cost" = Rs 18 per unit), 15% from coal (fuel cost = 8.30 Rs per unit), 48% from oil (private and CEB, fuel cost = 23.41 Rs per unit).

8. Is the price paid to Rs 18 for a unit of electricity from private small renewable power plants reasonable ? Our society seems to like wind power, solar power. Wind blows, sun shines, so what’s the problem, isn’t it ? "When I went to Germany, all roof tops were fitted with solar system" is the usual talk in cocktail circuits. Additionally, private investors like minihydro, as well. Prices paid for these range between 12-26 Rs per unit, depending on the year in which they signed the contracts, and the pool of these exotic forms of renewable energy cost Rs 18 per unit. Recently PUC ordered CEB to raise prices paid to them (usually, a regulator cuts the purchase prices proposed by CEB, but our regulator actually ordered CEB to raise the prices paid to such private investors). CEB has gone to courts against the order, if not for which, this Rs 18 would have been even more.

9. Is the cost of Rs 8.30 for producing a unit of electricity from coal reasonable ? Coal costs USD 150 per ton delivered to power plant (CEB says so, PUC has accepted, but no evidence has been published). A kilogram of coal can produce 2.5 units of electricity. Restructure, private or do whatever for CEB, its coal power plant can only produce 2.5 units of electricity per kilo of fuel input. Maintenance costs (cleaning, chemicals, consumables) are usually 50 cents per unit of electricity. So, anyone can now calculate and examine whether 8.30 is a reasonable cost to produce electricity from a coal power plant.

10. Is the cost of Rs 23.51 reasonable to produce a unit of electricity from oil ? The clues for the analyst are that a litre of fuel, even in a super efficient power plant can produce only 5 units of electricity from diesel, and 4.5 units of electricity from furnace oil. Our fleet of private and CEB power plants use diesel and fuel oil. Some private power plants are very good in fuel use, but even the most efficient one produces only 4.5 units for a litre of fuel. So, a litre of furnace oil is Rs 90, divide it by 4.5, and there you have the fuel expenses. A litre of diesel is Rs 120, divide that by 4.5, then you know how much it costs to produce a unit of electricity from diesel. If you care, you can ask any diesel generator supplier, how many units of electricity their machines produce for a litre of diesel. Add about one rupee for lubricating oil and maintenance. See how close your answer is to Rs 23.41. If the gap is large, then you know the room for savings, perhaps a little bit of fuel "leak" from power plants. On the other hand, even if all CEB and private sector power plants are super efficient, they can never produce 10 units for a litre of oil. That’s like expecting 30 km per litre from your car. Worldwide research is on-going perhaps to raise the electricity production from 5 to 5.2 units of electricity for a litre of fuel.

11. Study of despatch methodology is also essential for the analyst, because unlike any other commodity, electricity has to be produced when it is on demand. It cannot be stored as electricity. So how crucial decisions are made to start-up a power plant and set its electricity output to a particular value, requires study.

12. Finally, the transmission cost of 0.77 Rs and distribution costs of 2.72 Rs for a unit of electricity sold. This is somewhat a detailed study, where the allowed costs are divided into depreciation, return on assets (2%), operation and maintenance (staff and material), overheads, and retail services. Details of these costs for each one of the five distribution units is given (for 2011) in the PUC web. For example, it gives the cost of about Rs 500 to maintain the meter (customer pays for the meter on day one, nothing thereafter), replace once every few years, read the meter, issue a bill, collect the money, etc. per customer, per year. That is about 40 rupees per month per customer. Is that reasonable ? Go behind your meter reader and find how many meters he reads per day. Divide the salary you think he should be paid, by the number of reading he has to take per month. Other much larger costs too can be investigated in more detail. Furthermore, these costs can be compared with the costs of other countries, to examine where savings are possible.

Thereafter, the reader can pin point where savings are possible, and what the possible extent of savings would be, as things are. Then the analyst can also examine what component of such costs can be reduced if the power sector is (a) restructured (whatever that means), (b) reformed (whatever that too means), (c) deregulated (meaning moving towards more competition in electricity supply), (d) corporatized (each business line converted into Govt-owned companies), (e) privatized (all corporatized companies are sold off).

The reader may then analyse his preferences of exotic methods of producing electricity, as well: "I like solar power", examine the PUC web site, it says CEB is ordered to buy solar power at Rs 25.09 per unit. CEB wants to stay with last year’s price of Rs 20.70 per kWh, and has gone to court challenging PUC’s order to pay more. Then, look at your electricity bill, divide the cost by the number of units.

­If result is more than Rs 25, then you are entitled to begin a discussion, calling for solar power to be installed. That means you are willing to buy electricity produced at Rs 20 or so, sold to you at 25 Rs. Otherwise, if you were out on the street protesting that electricity prices be reduced from Rs 5.20 to 3.60, then you have no right to campaign for electricity to be purchased from solar power at Rs 20 (or 25) or wind power at Rs 26 per unit, because you are not willing to pay even Rs 5.60 for a unit.

All the above is to assist the reader to visualize and analyze the costs of supply of electricity. Do your homework, and then examine where cost savings are possible, and then agitate to reduce those costs. However much one cries, there is a fixed amount of fuel we have to spend to produce a unit of electricity. Separate that from the other costs.

If you, your company, your foundation, your association, your forum, your institute, your political party, your chamber, your consumer society, is too lazy to examine these calculations and pin point where the problems are, then, of course, you have only two options: silently pay the bills, or go around getting popular by calling for reforms, privatization, liberalization, competition, solar power, wind power, gas power, LNG, charge the rich, green energy, etc. and lean on more convenient slogans such as "corruption", "white elephants", "mafia", which fortunately for you, need not be quantified.

Similarly, if you are unable or unwilling to quantify, not alert, shouting only "corruption" but not working the numbers, then unknown to you, even your entitlement of about Rs 45 billion due next year owing to the operation of new coal power plants at Puttalam may be taken away by someone (bills of customers paying above Rs 22 per unit must drop by about Rs 6 per unit next year).